Russia Looks Best as Long-Term Play

DESPITE concerns over the state of President Boris N. Yeltsin's health, the consensus among analysts of Russian equities is that Mr. Yeltsin's free-market poli-cies will prevail in the face of political opposition and the volatility of the country's capital markets.

Indeed, the common view is that now is an opportune time to invest in Russian stocks — provided one is willing to ride out some ups and downs and hang in for a few years.

While red tape and legal restrictions make it almost impossible for foreign individuals to buy Russian equities directly, a growing number of Russia country funds — as well as Eastern and Central Europe regional funds that contain significant exposure to the country — are accessible to small investors.

Vontobel Fund Management SA's Eastern European Equity fund returned nearly 84 percent in the 12 months ended June 28. Arpad Pongracz, an adviser to the Luxembourg-registered fund, said some of the Russian stocks he has bought have risen eightfold since March.

He said Russia's post-election stock-market fall was "a short-term correction" and that the market's volatility could be "filtered out" by making plays of around three to five years.

Among the Russian stocks that have performed well for Vontobel, Mr. Pongracz mentioned G.U.M., the mammoth Moscow department store, whose shares are up 88 percent over the past 12 months; Lukoil, the state-controlled petroleum company, whose stock has gained 129 percent; Surgutneftegaz, a Lukoil rival, up 358 percent; and Nearmedic, a British-run biotechnology company that has developed a promising new AIDS drug, up a whopping 861 percent

"Where The Eastern European Equity fund requires a minimum investment of 5,000 Swiss francs ($4,110), and shares can be bought directly from Vontobel or through some international brokers.

Other funds with significant Russian exposure that are open to small investors include the U.S.-based Templeton Russia Fund, up 51 percent in the last 3 months, and the Fleming Russia Securities fund.

The Fleming fund is a closed-end vehicle traded over the counter in London and listed in Dublin in U.S. dollars. Focused on energy and utility stocks, its net asset value gained 70 percent over the first six months of this year. Minimum investment is a relatively hefty $50,000

Wolfgang Lafite, an executive at CreditAnstalt Investment Bank in Vienna, said that before putting money in Russia, investors should ask themselves one question: "Will the values you see in Russian equity markets be transformed into earnings?"

Once Russia's political risks are reduced, he said, Russian companies will be able to concentrate on showing profits by 1998. "Then investors will be able to focus on profit and loss statements, not hidden values," he said.

CreditAnstalt is preparing a $100 million-plus fund for institutional investors to be launched this year. It objective is to invest directly in industry, taking stakes in industrial and raw-material companies and holding them for four to six years while the fund's industrial experts work in Russia on restructuring the companies.

"The right thing is not to focus on the market but on long-term value creation," Mr. Lafite said.

Kent Osband, director of emerging markets strategy at CS First Boston in London, also was optimistic about Russian stocks. "The Russian economy itself has bottomed out and is robust," he said.

But he added that in many Russian companies, minority investors, particularly foreigners, still have little to no influence on management — a state of affairs that can make investment in Russian equities a passive play at best.

"Before the elections, Russian shares were so cheap that they rose as a call on Yeltsin's victory," he said. "The problem is, are the shares a real claim to ownership?"

Like any good Russian circus, the Moscow bourse has its bears as well as its bulls. Patrick Vauthey, director of Central and East European investments for the Geneva-based private bank and fund manager Pictet & Co., said now was not the time to buy Russian equities.

"In the long term Russia will always be a very attractive market," he said. "But in the short and medium term, it is overvalued. Not in terms of the companies themselves, but in terms of their value in a local economic context.

"Price-earnings ratios, cash flow to profit, book value to profit: You can't use these Western models when analyzing Russian companies," he continued. A company like Lukoil may have vast reserves in the ground, he said, but that "doesn't mean it can pump them out of the ground and it doesn't mean they can sell their oil at world prices."

Pictet's closed-end First Russian Frontiers Trust PLC is about 60 percent invested in Russian equities and gained 46.3 percent during the first half of 1996. It trades on the London Stock Exchange. But given his near-term outlook for Russia, Mr. Vauthey is more bullish on regional funds, including some run by Pictet, that are less exposed to the country.